Rajan delivers no surprises, holds interest rates

Published on:

01 Apr 2014, 12:00 am

As expected, Reserve Bank Governor Raghuram Rajan today kept the key policy rate (repo) unchanged since retail inflation still remains "sticky" but introduced steps to increase liquidity and contain volatility in the money market.

The RBI, in its first bimonthly monetary policy statement, left the short-term lending rate or repo rate unchanged at 8 per cent and the cash reserve ratio static at 4 per cent. It halved the overnight call money rate to 0.25 per cent and increased the 7-day and 14-day repo limits to 0.75 per cent from 0.50 per cent.

"At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy," said Rajan, who had in previous policy announcements surprised the markets with policy rate changes.

If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, the Governor promised there won't be any rate hikes.

On liquidity moves, Rajan said the primary objective is to improve transmission of policy impulses across the interest spectrum and improve liquidity in the system.

"The term repo has evolved as a useful indicator of underlying liquidity conditions. It also allows market participants to hold liquidity for a longer period...Evolving market-based benchmarks for pricing various financial products," he said.

On inflation, the Governor said he sees retail inflation softening in 2014 to under 6 per cent.

"Excluding food and fuel...Retail inflation remained sticky around 8 per cent. This suggests that some demand pressures are still at play," he said.

The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It said the FY14 current account deficit would be about 2 per cent of GDP.

"Most recently, export growth has slowed partly because of slowdown in demand in partner countries as well as a softening of prices of exports of petroleum products and gems and jewellery (offset by a reduction in the prices of oil and gold imports)," Rajan said.

"Whether the export slowdown persists as global growth picks up once again remains to be seen. In February, there was a turnaround in portfolio flows as investors largely priced in the effects of taper by the US Fed and responded to economic and geo-political developments in emerging markets with re-allocations," he added.

On liquidity, he said the central bank will continue to monitor conditions and ensure adequate flow of credit to the productive sectors.

"liquidity conditions have tightened in March, partly on account of year-end ‘window dressing’ by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness," he said.

The Reserve Bank will propose measures to reduce such practices, he added.

Bank of Baroda Executive Director Rajan Dhawan said the RBI will wait for additional data before deciding on the next policy.

According to State Bank of India Managing Director P Pradeep Kumar, the RBI's next policy would be data driven.

The second bimonthly monetary policy statement is scheduled to be announced on June 3.